Is Zoltek the Perfect Stock?

Finding companies that have all the right stuff can produce winners.

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Zoltek(Nasdaq: ZOLT) fits the bill.

The quest for perfectionStocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

Growth. Expanding businesses show healthy revenue growth. Although past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.

Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that a company can turn revenue into profit.

Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.

Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.

Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Zoltek.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

15.3%

Pass

1-Year Revenue Growth > 12%

20.6%

Pass

Margins

Gross Margin > 35%

10.0%

Fail

Net Margin > 15%

(5.3%)

Fail

Balance Sheet

Debt to Equity < 50%

0.0%

Pass

Current Ratio > 1.3

4.90

Pass

Opportunities

Return on Equity > 15%

(2.5%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0.0%

Fail

5-Year Dividend Growth > 10%

0.0%

Fail

Total Score

4 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful because of negative earnings during the period. Total score = number of passes.

With just 4 points, Zoltek isn't approaching perfection. But the company has exposure to some growth industries that could lead to a rebound in the future.

Zoltek makes carbon fibers, which are a lightweight way to reinforce composite materials, making them stronger without making them inordinately heavy. Carbon fibers have applications ranging from bicycles to wind turbines. In fact, Zoltek's largest customer by far is European wind giant Vestas.

Unfortunately, having half your sales come from one customer leaves you vulnerable to its ups and downs, as Zoltek found out in its fourth-quarter report last year. By contrast, competitor Hexcel(NYSE: HXL) boasts a much longer customer list that includes not only Vestas rival General Electric(NYSE: GE) but also defense and aerospace companies including Boeing(NYSE: BA) and United Technologies(NYSE: UTX). And while Zoltek again came in below analyst expectations in its most recent quarter, Hexcel topped estimates by a wide margin.

All that said, carbon fiber has a huge number of potential uses beyond where you'll find them now. If Zoltek can keep its foot in the door and continue to grow along with the industry at large, it could look a lot closer to perfect in the long run.

Keep searchingNo stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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